All Forum Posts by: David Nolan

@Arlen Chou It appears that wires are being crossed here. I am not a resident in the USA so I can not give, nor have I attempted to give SPECIFIC information regarding what to invest in. I am in the process of looking at the USA market to invest individually and as such I am on BP to learn about the markets, how things work. I am fully aware of ones need to research a market before acting.

I did not attack anyone's strategy as you say. My last post was about correcting Minh's suggestions that my points were flawed. If anyone attacked someone's strategy I would suggest it was Minh, but I did not take it as an attack, more a postulating of an alternative theory. There is nothing wrong with this concept of open discussion regarding different views.

My original post to the OP was to write a detailed business plan and be sure to understand the drivers in the market. I did not attempt to advise him, or anyone else where to invest. I do not have your experience in YOUR market so it would be remiss of me to even try to advise. However, my comments are valid in all instances because they are fundamentally correct.

I commend you on your success and I am sure many people on BP would learn from you. My question would be how much would you have made had you sold your properties before the market fell and re purchased them when they hit the bottom of the market? What I am saying is that if you hold property during a falling market you are losing money in regards to not being able to invest in better assets during that time. Re purchasing is then possible when the assets are less valuable thereby increasing your real growth. This is what I am suggesting would make you more money.

Learning about investing is not just market specific. The fundamentals of investing are universal and if you only want to learn about investing in one market and not in general then I would suggest that your learning will be limited. Your inference that I cannot add to one persons learning because it is not my market is ridiculous to say the least. But if that is how you see it then that is fine by me. I am not here trying to teach you or anyone else what to learn or how to do it. I am simply here to learn myself and to do this I appreciate open discussion about ideas and concepts that are appropriate. Your comments about tax free income when it is in fact debt is false. Minh's comments that rising interest rates never cause property values to fall is false. They may not be intentionally misleading but they are misleading to people who do not know differently. That is all I am noting here. the errors in the fundamental strategies and false beliefs are dangerous to novice investors.

I am looking forward to investing in the USA market at the appropriate time and who knows, it may even be in the SF Bay area and I know that, if that is so, then I will have learned from you something about your local market, so for that I thank you.

@Account Closed Hi Min

The overall point of my post was to bring to everyone's attention that money taken via a loan against equity is debt. Having said that and since you have posed two scenarios I will take the opportunity of commenting on them for you. So here goes.

1) Simply buying a property for $1 Mill cash would not be something I would do unless I knew I could add value to it immediately or I had knowledge of an increase in its value that is not dependent on the market simply moving upwards. There are some people however who would because they do not like to have debt. As you said one's appetite to risk will determine their investment strategy.

2) Why do people always use "if I had $1 Mill cash I would ...." What if you only had $10,000.00 cash, then what? Is the time and effort you need to put in to manage a property, take the risk, reduce your capacity to do other deals by taking on debt, have tenancy issues, get taken advantage of by unscrupulous property managers etc all worth it? I did not suggest that Arlan's strategy was wrong. Conserving capital and using leverage are sound strategies for all investors to use. What I am saying to you and to Arlan is that markets fall as well as rise. I personally do not want to have my money tied up in a falling market. This causes lost opportunities. It is known in investing as economic cost. That means what is the best alternative for the use of the funds. That is the cost of being in a falling market.

Anyone who goes to a lender with $1 Million of cash assets looks good to their banker. What if I had $1 Million of Berkshire Hathaway shares for which I borrowed $1 Million and I still  had my $1 Million in cash. Would the bank like me or you better? The answer is dependent on what your bank manager sees as lees risky, your property or my Berkshire shares. Your point is moot.

You say my strategy is working. I said to buy a property under FMV, rehab and then sell at some time in the near future. This you call work. Arlan buys a property at under FMV, rehabs it and then rents it out. How is this not work? We are doing the same thing with one difference. I look to realise my profit at some time in the near future, Arlan looks to hold for the long term and use his increased equity to increase his indebtedness to do more deals. Assuming we both did the same amount of work in getting our properties up to standard, then Arlan has to keep working n his to keep it rentable, collect the rent, deal with rental managers, tenants, contractors and do annual tax returns and ongoing monthly accounting and administration. I sell and I'm done. Who is working now?

Your assertion about Australian mortgages is incorrect. We do have 30 year term mortgages in Australia. If you mean 30 year fixed interest rate mortgages then I would suggest that interest rates change in fixed rate mortgages. No bank could possibly hope to survive by offering fixed interest over such a long period of time. Interest rate are set by banks as a margin over their cost of funds. The cost of funds change with economic conditions so banks must change their rates to stay in business.

Your request to show you a time when interest rates went up and property values fell is very naive to say the least. What do you think causes property to fall? Rising interest rates cause loan repayments to rise, this in turn places pressure on affordability and debt serving can become a problem In this instance people will sell or even be forced to sell due to their lack of ability to repay, due to interest rate rises, or lack of growth in their investment value. The more people that suffer this the more property comes onto the market. This causes an over supply of stock which drives property down in value. This is nothing more than basic economic theory. Surely you understand this?

The period you mention of property prices increasing when there were very high interest rates of up to 18% and rising prices is caused by the very high level of inflation, not just interest rates, coupled to limited supply necessary to meet demand. You might want to study economics a little more to grasp this concept. Interest rates are one part of a much bigger picture that affects investment decisions.

As far as your comment that..."Based on my limited experience, interest rate movements are typically an effect, not a cause." I am not sure what you are trying to say here so I will pass on commenting. If you would like to clarify your thoughts I would be happy to comment. In simple terms interest rates are tools used by governments to hep manage economies.

As for the flaw in my argument regarding whether equity is real or not. Equity on paper is just that, equity on paper and the only way you can pay your bills when your equity is on paper is through debt. You must borrow to pay bills if all your equity is on paper. If your equity is in cash you can use that cash to pay your bills. In order to realise your equity you incur costs which reduce your equity in real terms. Many investors make the mistake of becoming asset rich and cash poor. Yo keep looking at this perfect world of having $1 Million in cash in the bank. This is not real for most people. Cash is king for so many reasons.

One more thought I have is that Arlan mentioned, and you seem to agree with him, that over the past two years he has made a lot of equity, $700 K  and that the market will continue to rise. I would like to ask what would have happened had you and he started investing your millions in 2008. What would  your assets look like in 2011? Please don't try to tell me that the market always rises. Think GFC. It was real and wiped out many wise and experienced investors, not just in my country but in yours.

On a positive note I do agree with you that having liquidity gives you more options, buying below market value makes sense and individual risk aversion drives investment decisions. Or at least that is what my 30 years of experience has taught me.

I hope my ramblings have been of benefit to you. I wish you well in your endeavours and hope that these opportunities to openly look at how different people see things differently is of as much benefit to others as it is to me.

Happy investing!

@Arlen Chou Hi Arlen

I am sure you have a very good grasp of your market and no doubt manage your leverage accordingly. I am not suggesting that you cannot make money out of this strategy, clearly you can. However, you say that the post is asking "what you would do" as opposed to "what to do". Is this really different when someone is new to the business and is seeking ideas and no doubt some form of guidance? I agree that your post is in no way given as advice for Joel's specific case, but I think care about statements like tax free money is a little risky.

Investing in Australia is little different to the USA. Money is made when you buy property provided you can identify what to buy, and when to sell...if you ever do sell that is. And just like Australia the USA market has ups and downs. In the SF Bay area between 2008-2011 the property market in general fell 27%. That is more than enough of a fall to wipe out an investor who has the wrong amount of leverage. Whilst this would not wipe out anyone who has $700K of appreciation, subject to their gearing level, it means that for those three years the asset has not performed and therefore cost you money in lost opportunities elsewhere.

Markets grow relative to the value of the dollar over time. The illusion could be the real value of an asset relative to its buying power. Numbers on paper are great, but cash is king. Provided your realisable net worth is growing faster than the cost of living then you are on the right track. If not, then you are going backwards. You may be right that the market will keep growing, but I would suggest that it will not do so without a correction at some time and that is when you need to be very careful not to lose the gains you made. All markets are cyclical.

I appreciate that you have made other comments on this matter and I am sure that those of us who read them all gain something of value from them. Thanks for engaging me in this discussion. it is great to learn and I am always open to understanding how others achieve their success. As I said, my only real concern was the statement about debt being tax free money.

Happy investing!

@Arlen Chou Hi Arlen you mentioned in one of your posts that..."As the property appreciates, I refinance again to get more cash out. I am paying interest, but rates are low. The best part of this strategy for me is that money I am getting out is tax free!" 

I would suggest that this is not true. The money you access is a loan against what, on paper, is increased equity. It is not tax free money you are creating it is debt. Whilst this strategy has merit in some markets it can prove to be very dangerous. Let me give you an example.

You say that you are paying interest and rates are low, so the strategy appears to work. Imagine if you will that interest rates rise, as they do, and as a result of the rise in interest rates property values fall due to a whole range of economic reasons. You would find yourself with a rising cost of money, interest, and falling values. In other words you would be losing the equity your created and it will be costing you money to do so.

Equity created on paper is just that. On paper, it is not real until you realise it in cash. Imagine your property today is valued at $100,000.00 and you have a debt of $70,000.00 so your equity on paper is $30,000.00. This is before the costs of realising it are taken into consideration, i.e. selling costs, advertising costs, legal fees etc. However, in 6 months time the valuation on your property is now $110,000.00 so your paper equity is $40,000.00. great news, you are richer! But let's fast forward another 2 years and the market has fallen and your property is now valued at $80,000.00. Whoops, your equity is now only $10,000.00 and you have a problem. The bank will want their mortgage brought back to a 70% LVR, or $56,000.00 to stay compliant with their policy. You now need to find $14,000.00 cash to put onto the mortgage to bring it into line. Where will this come from. your own cash, your past equity, past borrowings? or will you need to sell the property to pay the debt off. Now you have an even bigger problem. I am sure you can see where this is going.

Your strategy is good provided the market is good to you. Unfortunately it is not always that way, so for those who are new to property investing please be sure and grasp a full understanding of what happens to leveraged deals when markets go down, and they do, often. using leverage to create wealth is a good strategy provided you understand the rules of the game. You may want to consider taking your profits at the appropriate time, i.e. turning your equity into cash, and then reinvesting into other equity creating opportunities rather than cash flow generating ones. If your average cash on cash return is say 30%, but could well be more, from doing a rehab, and your average cash investment was say $30,000.00 your potential pre tax profit would be circa $9,000.00. If this same property provided a positive pre tax cash flow of $200.00 per month you would need to hold this property event free for a period of 45 months to make the same gain. During this 45 months you are exposed to the market and all its variables. Personally, I would rather take my profit and move on. In fact in the same 45 month period I could possibly turn my money over 7 times based on a  6 month turn cycle. I could possibly generate 7 x $9,000.00 or $63,000.00 in the same time.

It is worth noting here that even though I would be trading over the same period of time I would not have the same exposure because I am never in the market for more than 6 months at a time. If the market started to fall I could sit on the sidelines for a while safe in the knowledge that I have taken my profits as cash and not watch them disappear in a puff of smoke. For people like @Joel G. who are starting out it is prudent to really understand these different strategies before making a move. The more we understand about our own skills, motivations and risk profile the more chance we have of winning at this game. Arlen, you are no doubt very successful in what you do, but I would not like to see newbies think that borrowed money is tax free cash. Good luck to us all.

Happy investing!

@Robert Bartman Hi Robert, might I start by asking what is your objective with this property? In other words what do you want to get out of it? You make money in real estate when you buy so it would be best if you could identify exactly what your gain will be for doing this deal with due consideration to the risk involved, the IRR, the time commitment on your part, the potential for a down turn in the market and what you believe the market growth will look like over the next cycle or two. In other words, as a famous actor once said, "show me the money".

Simply buying to hold for ever and a day is a dangerous game to play because markets move up and down and you can be richer, on paper, one day and poorer, on paper, the next. Cash is king so at some point in time you would be wise to turn your profits into cash ready to reuse in another profit making deal.

These are some of the basic things needed in analysing a deal to determine if it is worth the effort, risk and time involved.

Happy investing!

@Michael Delpier Happy to hear you got some value from my post. One of the greatest gifts you can ever give yourself is the gift of learning. Only you can choose to do it for yourself so thanks again for responding to my post, it is great to know that I have been able to share some of my knowledge with someone who wants to learn.

Happy investing!

@Joel G. Hi Joel to answer your question regarding a system to identify Opportunities and Threats in order to write a business plan the Opportunities are based on the drivers in your selected area that drive prices upwards. For example properties that present as bargains based on local market metrics, proposed changes to local planning laws, land re zoning, changes to market confidence, changes to access to capital, proposed population increases, shifting demographics, the falling cost of money etc. These and other drivers can create opportunities.

Likewise the negative effects of those same drivers can create threats, In order to do the business plan effectively you would be wise to understand the key drivers in the markets you propose to operate in. Unfortunately there are no short cuts to understanding these factors. You would be wise to learn from local operators who enjoy success in the markets you wish to trade in and seek their guidance as to what drivers they monitor the most.

To give you some guide, I am at present, after more than 30 years in this business in Australia, looking to enter the market in the USA. Hence joining BP and I am having to do the same level of research and homework that you would have to do. My vast knowledge base and experience will count for very little if I do not understand the local drivers of any market I propose to enter. All markets are unique in some  regard, but have common factors in many others. Making money in real estate is about understanding what it is that improves a property's value and they are not all necessarily to do with the individual property but more so to do with economies, international, national, statewide and local. The more you understand these things the better your business plan will be.

Furthermore, you started out asking what you should do with your assets and there are some good pieces of advice here about different ways to make money, however, they only apply if the method suggested fits within your business plan. I would suggest that once you have a detailed written business plan the types of deals you should do will become very self apparent. Once you have this clarity of vision you will see only those deals that will make financial sense to you and the confusion that many new investors find existing because of the vast majority of investment alternatives that exist will subside. The clearer your vision the easier it is to hit the target. The target being your financial goals. A sound, well thought out and researched business plan is one of the the keys to creating good vision in investment decision making.

If you have limited experience in writing a business plan I would strongly suggest hiring an accountant or business adviser with the experience you lack to help. The money invested will be repaid many times over by having a clear path to follow and one that shows very clear financial objectives and strategies.

Hope this helps.

Enjoy the journey!

@Joel G. Hi Joel and welcome to the world of REI for a living.

I would suggest the following as a start. Write a detailed business plan of what you want your business to be. This is a business so treat it like one. Pay particular attention to the SWOT analysis. Strengths, Weaknesses, Opportunities and Threats. Your Strengths and Weaknesses are unique to you and are basically under your control. The Opportunities and Threats are what the market controls. You would be wise to be sure an have a plan to take advantage of the Opportunities and mitigate the Threats.

Once you have done those things then set some goals. Be sure your goals are in line with your values, lifestyle choices and financial capabilities, one of which is to understand your personal risk profile. This means can you live with a lot of debt, some debt or no debt and be at ease with yourself. If you cannot handle being in a lot of debt then be sure not to overly leverage your deals. Then set a realistic budget, and stick to it.

After you have done these things your path should appear a little clearer as to what types of deals you might like to do and where you might like to do them. This would then lead you to one of the most important aspect of REI. Understand the drivers of property prices in your chosen market. Simply following the crowd as many do and relying on the market to drive prices up, with little or no knowledge of how it is happening, what is driving it, is very dangerous indeed for a anyone in this business. You NEED to know what drives your market. Is the market at the bottom of the cycle or the top? Can I add value to this deal? Is it the right property for my objectives as per my business plan? What are my risks both financially and emotionally? Do I have confidence in this deal? These are all questions I would ask before I do a deal.

Property markets are cyclical, they move up and down. Please do not fall for the false belief that property always rises in value, it doesn't. Develop a sound business plan and stick to it. Learn as much as you can about the market you choose to work in. Don't over extend yourself financially, emotionally or physically. Stick to what you are capable of and you could enjoy a great career as an REI.

Good luck on your journey!

@Scott Trench Hi Scott, Good work on the chat, unfortunately I do not have a chat icon at the bottom of my screen nor do I have a chat icon next to my picture. I am located in Australia so not sure if that has anything to do with it. Perhaps international chat is more complicated...lol.

Looking forward to being able to use the service.

Cheers!

@Ron Thomas Hi Ron, thanks for your support with Bob. Not sure exactly why he feels the need to be obnoxious. He chooses not to answer questions but wants to portray that he knows the answers. Maybe he does, maybe he doesn't. Unfortunately his approach, whether humorous or otherwise is not of any great learning value to the new investors looking for advice on BP. I am new to BP but not new to investing so I would like to think that the humour of Bob is funny, but the not so funny aspect is how it may misguide less experienced people to believe there is no risk in leverage.

I joined BP to learn about the market in the USA before I start my investment program. This is good learning for me as it shows very clearly that there are people all over the world, here in Australia and in the USA, who either do or do not know what they are doing and either help or hinder the learning process. It's all about perspective. Thanks for your honest, open input and Bob, thanks for your humour.

On with the learning!